Varun Beverages Ltd

About the Company

Varun Beverages Ltd (VBL) is the second-largest franchisee in the world (outside the US) of carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”) sold under trademarks owned by PepsiCo and a key player in the beverage industry. They produce and distribute a wide range of CSDs, as well as a large selection of NCBs, including packaged drinking water. PepsiCo CSD brands sold include Pepsi, Diet Pepsi, Seven-Up, Mirinda Orange, Mirinda Lemon, Mountain Dew, Seven-Up Nimbooz Masala Soda, Evervess Soda, Sting, and Gatorade. PepsiCo NCB brands sold by the company include Tropicana (100%, Essentials & Delight), Tropicana Slice, Tropicana Frutz, Seven-Up Nimbooz, and Quaker Oat Milk as well as packaged drinking water under the brand Aquafina.

Q1 CY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)

Mar CY21

Mar CY20

YoY %

Dec CY20

QoQ %

Sales

1344.2

1000

34.42%

894.7

50.24%

PBT

5

77

-93.51%

-78.8

106.35%

PAT

76.9

55.4

38.81%

-54

242.41%

Consolidated Financials (In Crs)

Mar CY21

Mar CY20

YoY %

Dec CY20

QoQ %

Sales

1724.5

1382

24.78%

1275.5

35.20%

PBT

7.8

62.5

-87.52%

-64.2

112.15%

PAT

60

40

50.00%

-53.95

211.21%

Detailed Results

The current quarter was very good for the company with 25% YoY growth in consolidated revenues.

Consolidated Profits were excellent with over 50% YoY growth.

The company saw an EBITDA growth of 24% YoY and volume growth of 26% YoY in the quarter.

Organic volume growth in India declined by 13.7% due to disruption caused by COVID-19 in the last 10 days of March. The company saw organic volume growth 14% and 42% in Jan and Feb respectively.

A consolidated organic volume decline of 9.3%. Realization per case came down 2.3% due to lower sales realization in Zimbabwe in USD terms.

CSD accounted for 67%, Juices 7%, and packaged water was 26% of total sales volumes.

EBITDA margins improved by 11 bps YoY as savings in material costs were offset by higher fixed costs amid low sales in the last 10 days of March.

Depreciation increased 36.4% YoY due to the consolidation of the South and West India sub-territories.

Finance costs also rose 47.3% YoY as the acquisition of the South and West India territories was funded through debt.

The company reported exceptional items of Rs 66.5 Cr which represents provision for impairment in the value of certain plant and equipment, glass bottles & plastic shells.

Investor Conference Call Highlights

The management has stated that the company is focusing on preserving the interests of all stakeholders and shoring up cash flows for the disruptive times ahead.

The company has built up an additional stock of inventory in March in anticipation of disruption in industrial and manufacturing activities.

The management is confident of good growth post the lockdown period.

The management has mentioned that the plant shutdown was only till 20th April and operations with reduced shifts have started in all manufacturing facilities for the company.

The company is witnessing good demand as sales are going up for the company in April.

The company has less than 10% of sales from institutional clients, all of which have gone to 0.

The management has stated that margins should suffer in the coming quarter mainly due to high fixed costs and low volumes on account of the lockdown.

The company had gross debt of Rs 3200 Cr on 31st March 2020 and a cash credit line of around Rs 476 Cr.

The management has mentioned that the distribution network is working well outside of red zones and the company is seeing demand rising in these areas. The management has also stated that its distributors are not facing any big issues that would require monetary or financial assistance from the company.

The management believes that its distributors have adequate inventory and they shouldn’t face any shortages.

The management is confident of maintaining EBITDA margins by offsetting the impact of fall in savings with cost savings initiatives.

The management states that a lot of the sales of packaged water is from institutional clients which are mostly used in gatherings. This is expected to stay down in the coming quarter and thus affect product mix accordingly.

Rural markets are comparatively open as compared to urban markets. Thus volumes from rural areas are marginally higher than urban areas. In normal times, rural sales are 30% of total sales. Semi-urban areas account for another 30% while urban areas account for 40%.

The EBITDA per case should go up as discounting has gone down due to the supply crunch.

The company has not lost any distributors to poaching from competitors.

The company does not carry an inventory of more than 30 days and thus there shouldn’t be any problems with overstocking or understocking at current inventory levels.

The management does not feel that the company’s products should face any demand slowdown due to economic damage to the country. This is because its products are in the small ticket discretionary item which is low on the list of things to cut down in economic slowdowns.

The management believes that post lockdown, the company shouldn’t face any challenge in logistics, and volumes should return as normalcy returns to different territories.

In FY20, 30-40% of total consumption was from on the go sales.

The company sold 114 million cases in the quarter out of which 94 million was sold domestically while the rest was international.

The management has mentioned that around 60% of employee costs are for permanent employees and the rest is for temporary and contractual workers.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. The company has seen good growth in the quarter with good organic volumes growth in Jan and Feb. The lockdown has hit the company’s sales hard but demand seems to have stayed resilient as sales volumes have been rising since the opening of sales since 20th April. The company has indeed been hit hard with low sales volumes for more than a month into its peak season. But the rising sales patterns are expected to continue as more and more areas come out of lockdown. It remains to be seen whether there is a further economic disruption in the future from COVID-19 which may have severe second-order effects on the company’s performance. Nonetheless, given the resilient sales network, the rising demand for the company’s products, and the arrival of the peak season for the beverages industry, Varun Beverages is a good consumption stock to watch out for at present. However, as it is a capital intensive business, the current pandemic can put a strain on the Balance Sheet which is already laden with debt. The valuation at current levels does not give any margin of safety at the moment.

Q2 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)

Q2FY20

Q2FY19

YoY %

Q1FY20

QoQ %

9 Months (Sep ’19)

9 Months (Sep ’18)

YoY%

Sales

1350.24

837.05

61.31%

2468.5

-45.30%

4818.95

3499

37.72%

PBT

98.76

82.83

19.23%

537.3

-81.62%

713.1

531.88

34.07%

PAT

65.23

63.6

2.56%

382.1

-82.93%

502.8

386.18

30.20%

Consolidated Financials (In Crs)

Q2FY20

Q2FY19

YoY %

Q1FY20

QoQ %

9 Months (Sep ’19)

9 Months (Sep ’18)

YoY%

Sales

1778.66

1205.04

47.60%

1205.04

47.60%

6015.46

4433.07

35.70%

PBT

115.62

65.35

76.92%

582.3

-80.14%

760.43

520.39

46.13%

PAT

81.12

44.15

83.74%

404.99

-79.97%

526.15

370.68

41.94%

Detailed Results

The current quarter was very good for the company with 48% YoY growth in consolidated revenues.

Consolidated Profits were excellent with 84% YoY growth.

The company saw an EBITDA growth of 54% YoY and volume growth of 60.4% YoY in Q2.

Organic volume growth in India was at 17.5% due to the consolidation of South and West India Sub territories.

International territories saw organic volume growth of 27% with Morocco, Zimbabwe, Nepal and Sri Lanka growing more than 10% each.

CSD accounted for 69%, Juices 6%, and packaged water was 25% of total sales volumes.

Depreciation increased 27.5% YoY due to capitalization of Pathankot plant and consolidation of the South and West India sub-territories.

Finance costs also rose 83.9% YoY as the acquisition of the South and West India territories was funded through debt.

The entire proceeds of the QIP amounting to Rs 900 Cr were utilized for repayment of debts during Q3 2019.

The company launched three variants of ambient temperature value-added dairy beverages under the Cream Bell brand – Belgian Chocolate, Cold Coffee and Mango shake at a price of Rs. 30 for 200ml PET bottle with a long shelf life of 180 days.

The company acquired 20% shareholding in Lunarmech Technologies Pvt Ltd for Rs 15 Cr which brings the effective shareholding of VBL in Lunarmech Technologies to 55%.

Investor Conference Call Highlights

The company saw total volume growth of 60.4% driven by healthy offtake in the domestic market and increasing growth in international markets.

The company acquired 2 new facilities in the quarter, one in Dharwad in Karnataka for Rs 74.7 Cr and the other in Tirunelveli in Tamil Nadu for Rs 20 Cr.

CRISIL has upgraded the company’s long term debt to AA from AA-.

The management believes that rural expansion for the company and its products has been instrumental in maintaining their volume growth despite industry slowdown.

The growth rate in CSD is faster than the growth rate in water in India.

The management states that the growth in margins was mainly due to the improved product mix and the rise of water in the overall product mix.

The company has improved its GTM strategy and has made a good level of new hires in the new territories to capitalize on its expansion and drive growth.

The management has maintained that the Capex plans in the future would be smaller than in the past and only expansions to existing facilities would be taking place.

The management maintains that their PET is completely recyclable and they are also submitting a model to the govt detailing how they will be collecting and recycling all the PET that the company has produced and thus the company’s products should not be adversely affected by the proposed plastic ban that is going around the country.

The annualized volumes for Pepsi should be around 135 million cases in FY19 and the company accounted for 60% of it.

The company is evaluating the impact of the reduced tax rate and they will take any actions after December due to the calendar year-end in that month for the company.

The company has not made any new additions to the provision for Zimbabwe and any changes to it have been due to mark to market. This provision is to mitigate and hedge foreign currency risk in the country. If the foreign currency remains stable until the maturity of the contract (2.5 years) then the entire contents of the provision (Rs 137 Cr) will be added back to the P/L.

The average realization should go up as Tropicana and the ambient milk beverages share in the product mix goes up since these are high realization products.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and has been quite proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which has helped them achieve phenomenal volume growth. The company has also seen very good organic growth across all of their territories and have maintained that it will continue its growth pace on the back on increased rural penetration and greater consolidation in new territories. The company has raised equity which it has used to pay off some of its existing debt and has also issued interim dividends. The company’s foray into ambient milk beverages is encouraging but it remains to be seen how it will capture market share in an already crowded market. Nonetheless, given the rapid rate at which the company has grown in the recent past and the potential for increased penetration into rural markets, Varun Beverages is a good stock to look out for, particularly given their performance so far this year.

Q1 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)

Q1FY20

Q1FY19

YoY %

Q4FY19

QoQ %

Sales

2468.5

1755.6

40.61%

1000.2

146.80%

PBT

537.3

403.9

33.03%

77

597.79%

PAT

382.1

289.1

32.17%

55.45

589.09%

Consolidated Financials (In Crs)

Q1FY20

Q1FY19

YoY %

Q4FY19

QoQ %

Sales

2854.8

2097.5

36.10%

1382

106.57%

PBT

582.3

424

37.33%

62.5

831.68%

PAT

405

306.8

32.01%

40

912.50%

Detailed Results

The current quarter was very good for the company with 36% YoY growth in consolidated revenues.

Consolidated Profits were excellent with 32% YoY growth.

The company saw an EBITDA growth of 37% YoY and volume growth of 43.3% YoY.

Organic volume growth in India was at 18.5% due to increased penetration and extended summer.

Capacity utilization during peak month has come down to 60% post consolidation of South and West India sub-territories.

The board of directors has recommended a bonus share issue of 1:2 and an interim dividend of Rs 2.5.

The company now accounts for more than 80% of PepsiCo India beverage volumes.

CSD accounted for 74%, Juices 8%, and packaged water was 18% of total sales volumes.

Gross margins declined 74 bps in Q1 mainly due to a rise in sugar prices and preforms.

Depreciation increased due to capitalization of Pathankot plant and consolidation of the South and West India sub-territories.

Finance costs also rose 63.9% YoY as the acquisition of the South and West India territories was funded through debt. Net debt to equity ratio stand at 1.49 times on 30th June ’19.

Net Capex of Rs 2350 Cr to be incurred in H1FY20.

Working capital days remained stable at 14 days.

Investor Conference Call Highlights

The company has made a provision of Rs 65 Cr in Q1 for currency-related issues in Zimbabwe.

The company has crossed 12% in market share in Morocco and has 80% growth in volumes in the last 6 months.

The management does not see the FMCG slowdown affecting sales volumes of their products.

The CAPEX for the quarter has gone up to Rs 2132 Cr while operating cash flows before interest was at Rs 1214 Cr.

The organic growth rate for juices was 24.6% while the same for water came in at 17.2%.

The company is expecting margin improvement on account of the commencement of in house juice production in the Pathankot plant from July onwards.

The company will not be looking for any new expansion for the next few years except for maybe Tropicana.

The management does not expect large margin enhancement and is satisfied with current margin levels.

The company is holding on to its plan for QIP equity issuance later in the financial year.

The company will not undergo any CAPEX in the South and West territories as they have enough excess capacity in these regions for a few years.

The company sold 172 million in domestic volumes and 24 million in international volumes.

Out of the domestic 172 million, around 30-33 million were in the South and West territories.

The management had expected the consolidation of new territories to take at least 6 months to 1 year and margins to stay subdues in this period but the consolidation went smoothly without any detriment to margins.

The main reason for consolidated margins to inch back to 5% is said to be Morocco performance. Morocco used to be a loss-making unit for the company which turned profitable on the introduction of water into the market and brought up margins and EBITDA on a consolidated basis.

The management has stated that if in case they face any water shortages in their plants, they will get it transported. The company has so far not faced any problems due to this issue and they maintain that they are a water surplus company, i.e., they put more water into the ground than they take out.

The management expects to keep margins at current levels of 21-22%.

Q3 can be expected to be better than last year’s Q3 mainly because of the return to profitability of Morocco operations and the fact that internationally Q3 is the best quarter for the company seasonally.

The company won’t be undertaking any price hikes as preform prices have normalized and sugar prices are lower in South & West thus easing raw material price pressures.

The company will start making its own dairy products from next month onwards in the Tropicana plant.

The capex guidance for FY20 is that it won’t exceed the depreciation for the company.

The company expects to be growing at a pace of 17-18% in water as they have for the past 2 years.

In percentage terms, the margins in CSD are similar to water.

Analyst’s View

Varun Beverages have been one of the biggest bottlers in India and have been quite proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which should add to their already large volumes. The company has provided phenomenal operating results in the last quarter mainly due to the start of profitability and huge growth in Morocco operations and the extended summer which has enabled the company to boost sales volumes a lot. The integration of the newly acquired territories has gone better than expected and this is expected to bring higher sales in the near future. It remains to be seen how long the company will be immune to the demand slowdown in the FMCG industry. Nonetheless, based on their strong performance in the last 6 months and their international growth potential, VBL seems like a prime investment to investors of all types. Valuation, though, is a little stretched at current levels.

Q4 2019 Updates

Financial Results & Highlights

Standalone Financials (In Cr)

Q4FY19

Q4FY18

YoY %

Q3FY19

QoQ %

Sales

1000

906.3

10.34%

459.5

117.63%

PBT

77

45

71.11%

-68.9

-211.8%

PAT

55.45

33.5

65.52%

-53.8

-203.1%

Consolidated Financials (In Cr)

Q4FY19

Q4FY18

YoY %

Q3FY19

QoQ %

FY19

FY18

% Change

Sales

1382

1130.5

22.25%

816.9

69.18%

5105.26

4003.4

27.52%

PBT

61.7

29.9

106.35%

-87.25

-170.72%

433.8

290.9

49.12%

PAT

40

19.7

103.05%

-70.8

-156.50%

299.8

214

40.09%

Detailed Results

The company witnessed strong growth in the last quarter with consolidated revenues rising 22% YoY and profits rising more than 100% YoY.

The FY19 performance has also been good with 28% YoY rise in revenues and 40% YoY rise in profits.

The company also recorded a robust volume growth of 12.3% in the last quarter driven mainly by expansion into Morocco and Zimbabwe.

VBL extended its agreement with PepsiCo which was set to expire in 2022 to 2039.

They also acquired franchise rights for bottling, sales and distribution in 7 States and 5 Union Territories covering South and West regions of the country.

Total Sales volumes breakup is as follows:

CSD: 71%

Juices: 6%

Packaged Drinking Water: 23%

Sales volumes for India grew only 4.6% in the last quarter due to extended winter. Volume growth in international territories has been more than 58%.

Gross margins of 55.9% in the last financial year while EBITDA margin came at 16.1%.

Net debt to equity ratio stayed stable at 1.3 times in the last financial year.

Investor Conference Call Highlights

VBL accounts for more than 80% of PepsiCo’s India sales volumes.

The company has added a new installed facility in Pathankot this year and acquired 9 new manufacturing facilities in West and South India.

The company introduced Aquafina water in Morocco which has been vital to pushing volumes in the country and overall sales volumes in general.

The company’s market share in Zimbabwe stands at 50%+ currently.

The company is also exporting some volumes soon from their Zimbabwe facility to Botswana and Malawi.

The company is currently not planning any major capex this year.

The company has guided that they will focus on keeping overall capex below 40% of their depreciation.

Around 80% of sales volumes is domestic while the rest is in international territories.

The company has improved its supply chain by eliminating extra warehouses and delivering directly from plant to big distributors and hubs.

The production in the new Pathankot facility is expected to start from next month onwards.

The new production should help margins since it will be producing Tropicana products which yield higher margin and would eliminate extra expenses in freight that the company incurs for current Tropicana product sales.

The company does not see any requirement of conducting capex to upgrade the newly acquired plants in South and West India.

The current debt at consolidated basis should roughly come to Rs 4000 Cr.

The Morocco business was loss making till last quarter because there was a non-compete agreement in place which expired in the last quarter. Due to the introduction of packaged drinking water, sales volumes rose more than 70% QoQ and is expected to stay high going forward given the high demand for packaged water in the arid country of Morocco.

VBL estimates that they will reach peak capacity utilization of 70% in their peak month of the year.

The annual revenues from Tropicana business is around Rs 300 Cr.

The company estimates that it will take them around a year to fully utilise and ramp up their new territory acquisitions.

Analyst’s View

Varun Beverages has been one of the biggest bottlers in India and has been proactive in international expansion for some time now. They have successfully acquired exclusive rights for Pepsi bottling and distribution in West and South India which should add to their already large volumes. The company has also proved themselves by maintaining good margins for a bottler and have capitalized well on their inorganic acquisitions and expansions. The critical factor to evaluate is how VBL meets its capex and working capital requirement. It is a highly capital intensive business. While it generates a decent cash from operations, all of that is utilized for meeting their capex requirements. They have sizeable debt on the books. Debt equity ratio is 1.6 and interest coverage ratio of just a shade under 3 warrant a close monitoring on the cash generation ability of the company. Moreover, while they are selling brands of Pepsi, they do not possess any pricing power. Nonetheless, VBL is a stock to watch out for anyone believing in the general consumption of beverages which includes CSDs, NCBs fruit juices and packaged drinking water segments on sheer growth in volumes and increasing scale of their operation.